March: In Like a Lamb, Out Like a Yo-Yo

Across all the major market indices for March, we saw a lot of volatility from one day to the next. The S&P 500 was down about 2% for the month, although it rallied a little bit into the end of March from some of its mid-Month lows.

There was a mixture of strong and weak economic data throughout the month, contributing to the market’s “yo-yo”-like volatility. Job growth, for example, far exceeded expectations as 295,000 jobs were created (vs. expectations of 235,000). Yet growth in average hourly earnings — a key metric followed by the Fed — remained far more sluggish than 2007 levels.

We also saw a lot of evidence that the markets are still very dependent on the Fed’s interest rate policy. Bad news was often received as good news by the markets (e.g. poor retail sales numbers), with the idea being that if the economy remained soft, the Fed would have to delay raising interest rates until at least later in 2015. The Federal Open Market Committee’s statement helped spark the mid-month rally, as the market interpreted the statement as a sign that rate increases would be further out than originally anticipated and that the pace of rate increases would be very gradual.

Finally, the strength of the dollar contributed to the market’s volatility in March. For an in-depth discussion of the impact of a strong dollar (pros and cons), we recommend this article by Bob McTeer, the former President of the Dallas Fed.